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The Wit and Wisdom of Warren Buffett

Berkshire Hathaway’s annual meeting in Omaha concluded over the weekend. Journalists are combing through Warren Buffett’s comments and annual letter for investment nuggets. Here are a few of my own favorites gathered over the years.

Ask Buffett for the explanation for his investing success and he’ll respond “compound interest” without skipping a beat. Albert Einstein called it the eighth wonder of the world. Here’s the catch, you’ve got to stay in the market. Because we all like to look, we can get scared out of the market at just the wrong time!

Buffett has a pithy saying for that; “Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.”

He counsels investors to, “befearful when others are greedy and greedy when others are fearful.” That is a pure contrarian play and sounds easy, but is hard. It has a bit of a market timing sound to it which would go against his favorite holding period: forever!

Actually, periodic rebalancing of a portfolio back to its long run asset allocation is a contrarian strategy as you are selling asset classes that have done well and buying those that have lagged. APCM does this. It works.

At this year’s annual meeting Buffett railed against the high fees charged by hedge funds and consultants. It’s a reprieve of his “Gotrocks” parable about a wealthy family, the “Gotrocks”, who earned poor returns because of advice from the “Helpers” that consisted of hyperactive management, high fees, and high turnover.

Buffett gave an update on a bet he agreed to 8 years ago. Buffett bet Protégé Partners that the S&P 500 would beat any five hedge funds they selected over a 10-year period. For the 8 years ending 2015, the S&P is up 65.7% while the hedge funds are up 21.9%. That is quite a spread! Below is a chart showing the annual returns for an S&P 500 Index fund and the basket of hedge funds picked by Protégé Partners.

Chart: Bloomberg

Buffett doesn’t spare everyday investors. He once bemoaned the short time horizons of investors and their demand for managers to just do something. “The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘swing, you bum!’”

I have always liked, “When the tide goes out you can see whose been swimming naked.” A falling market reveals things like Bernie Madoff’s scheme or excessive leverage at companies. Be especially wary when markets plunge as weaker players will be washed away. I think this is a reason for conservatism and argues against borrowing too much.

His best advice is also the most patriotic. People have been betting against America since 1776. It hasn’t worked yet. Be very careful about underweighting U.S. stocks in portfolios.

I’ll be speaking on Keys to Investment Success next Monday, May 9 from 12:00pm-1:30pm at the UAA Campus Bookstore. Everyone is welcome!